Can We Engage the Private Sector in Joining Governments in Funding Programs for Energy and Infrastructure Programs?

30 10 2011

The Canadian approach to funding energy and infrastructure projects should include, in future, investment funds jointly funded and managed in cooperation with the private sector.

To date, in part because many provinces in Canada generally power their electricity grids by means of government owned power utilities, the burden for raising equity for investment in the electrical power generating sector has fallen in large measure on the tax revenues accrued by provincial governments, and by the rate-payers. Strategies for electrical energy sector investment have also been developed in large measure by provincial government energy ministries which then must vie with competing budgets in other ministries, and market forces. Capital outlays for needed new electrical power developments can easily result in severe effects on government fiscal policy where those outlays are paid for by public debt instruments and tax revenues.

Some provincial governments have made the electrical energy sector more open to development by private investors, most notably in Ontario. However, huge capital investment is still needed in the province to meet forecast demand loads, which will place great pressure on the governments’ ability to manage and meet all the demands on its fiscal policy. Similar considerations apply to most other provinces in their energy sector strategies.

Ontario has also led the way in providing an overall government agency to promote and advise on investment strategies for electrical power generation, including investment in clean energy producers. This agency, the Ontario Power Authority, advises and directs the government and business leaders in matters of developing and allocating investment programs.

While this policy approach has resulted in meaningful improvements to the development of diverse and clean electrical energy supplies, huge capital outlays are still required for sustaining and building base-load power generation. It may be possible to address these funding issues by engaging private investors in a government sponsored investment fund to build capital reserves for new electrical developments, including base-load power generators.

Such a fund, structured along the lines of a mutual fund, would provide a source of capital for power generator providers where the private and public investors would be compensated by dividends arising from the revenues accruing from the new electrical power generation. It would have the advantage of funding provincial and private investments in the sector by providing a source of equity otherwise not available. It would also address impacts on the debt load on the provinces that otherwise would accrue from current approaches to funding new power plants.

Certain tax credit mechanisms may be included for private investors to apply against other capital gains and taxable revenue streams. Equity raised by the funds would be done on a “just in time basis,” and electrical power developers would be required to make interest payments on capital obtained from the fund, in advance of dividends arising from revenues that may later be realized by power generation from new power plants. In this manner, investors would be compensated in a reasonable and timely manner for capital investments in power plant construction that would take many years to complete. Companies, including government owned companies, that borrow capital from the funds would be held to strict financial guidelines to ensure that the companies are on a sound investment grade structure. Any investment capital provided by the funds would be done as a secured debt meeting applicable provincial legislation, or through other ad hoc means of reciprocal equity financing by providing direct and proportional ownership of the new plants by fund investors.

In a time of fiscal stress now impacting provincial and federal governments, new financial strategies will be necessary to address demands and impact on government’s fiscal policy. This would be true, as well, for infrastructure projects generally.

Joint government and private sector investment strategies for infrastructure investment may be just what the doctor ordered in these times of fiscal stress.

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